The External EnvironmentOpportunities, Threats,Industry Competition,And Competitor Analysis

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

Seventh edition

STRATEGIC

MANAGEMENT

INPUTS

STRATEGIC

MANAGEMENT

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© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.All rights reserved.All rights reserved.

CHAPTER 2CHAPTER 2

The External The External Environment:Environment:Opportunities, Threats,Opportunities, Threats,Industry Competition,Industry Competition,and Competitor Analysisand Competitor Analysis

© 2007 Thomson/South-Western. All rights reserved. 2–2

KKNOWLEDGENOWLEDGE O OBJECTIVESBJECTIVES

1.1. Explain the importance of analyzing and understanding Explain the importance of analyzing and understanding the firm’s external environment.the firm’s external environment.

2.2. Define and describe the general environment and the Define and describe the general environment and the industry environment.industry environment.

3.3. Discuss the four activities of the external environmental Discuss the four activities of the external environmental analysis process.analysis process.

4.4. Name and describe the general environment’s six Name and describe the general environment’s six segments.segments.

5.5. Identify the five competitive forces and explain how they Identify the five competitive forces and explain how they determine an industry’s profit potential.determine an industry’s profit potential.

Studying this chapter should provide you with the strategic management knowledge needed to:


KKNOWLEDGENOWLEDGE O OBJECTIVES BJECTIVES (cont’d)(cont’d)

6.6. Define strategic groups and describe their influence on Define strategic groups and describe their influence on the firm.the firm.

7.7. Describe what firms need to know about their Describe what firms need to know about their competitors and different methods (including ethical competitors and different methods (including ethical standards) used to collect intelligence about them.standards) used to collect intelligence about them.

Studying this chapter should provide you with the strategic management knowledge needed to:


FIGUREFIGURE 2.12.1 The External EnvironmentThe External Environment


General EnvironmentGeneral Environment

• Dimensions in the broader society that influence Dimensions in the broader society that influence an industry and the firms within it:an industry and the firms within it:

DemographicDemographic

EconomicEconomic

Political/legalPolitical/legal

SocioculturalSociocultural

TechnologicalTechnological

GlobalGlobal


TABLETABLE 2.12.1 The General Environment: Segments and ElementsThe General Environment: Segments and Elements



Center Stage for the Twenty-first Century

Power Plays in the Indian Ocean

Americans, in particular, concentrate on the Atlantic and Pacific Oceans

The Indian Ocean is dominated by two immense bays, the Arabian Sea and the Bay of Bengal

Trade in frankincense, spices, precious stones, and textiles brought together the peoples flung along its long shoreline during the Middle Ages.


Global energy needs are expected to rise by 45 percent between 2006 and 2030, and almost half of the growth in demand will come from India and China. China's demand for crude oil doubled between 1995 and 2005 and will double again in the coming 15 years or so; by 2020, China is expected to import 7.3 million barrels of crude per day -- half of Saudi Arabia's planned output. More than 85 percent of the oil and oil products bound for China cross the Indian Ocean and pass through the Strait of Malacca.

Even today, in the jet and information age, 90 percent of global commerce and about 65 percent of all oil travel by sea.

Moreover, 70 percent of the total traffic of petroleum products passes through the Indian Ocean, on its way from the Middle East to the Pacific.

India’s coal imports from far-off Mozambique are set to increase substantially, adding to the coal that India already imports from other Indian Ocean countries, such as South Africa, Indonesia, and Australia. In the future, India-bound ships will also be carrying increasingly large quantities of liquefied natural gas (LNG) across the seas from southern Africa, even as it continues importing LNG from Qatar, Malaysia, and Indonesia.


State Capitalism Comes of AgeThe End of the Free Market?

Across the United States, Europe, and much of the rest of the developed world, the recent wave of state interventionism is meant to the state's heavy hand in the economy is signaling a strategic rejection of free-market doctrine.

PRINCIPAL ACTORS

State capitalism has four primary actors: national oil corporations, state-owned enterprises, privately owned national champions, and

sovereign wealth funds (SWFs).


When thinking of "big oil," most Americans think first of multinational corporations such as BP, Chevron, ExxonMobil, Shell, or Total. But the 13 largest oil companies in the world, measured by their reserves, are owned and operated by governments -- companies such as Saudi Arabia's Saudi Aramco; the National Iranian Oil Company; Petróleos de Venezuela, S.A.; Russia's Gazprom and Rosneft; the China National Petroleum Corporation; Malaysia's Petronas; and Brazil's Petrobras.


State-owned companies such as these control more than 75 percent of global oil reserves and production. Instead, they want to use the market to bolster their own domestic political positions. State-owned enterprises help them do this, in part by consolidating whole industrial sectors.

Angola's Endiama (diamonds), Azerbaijan's AzerEnerji (electricity generation), Kazakhstan's Kazatomprom (uranium), and Morocco's Office Chérifien des Phosphates -- all of these state-owned firms are by far the largest domestic players in their respective sectors. Some state-owned enterprises have grown particularly enormous, most notably Russia's fixed-line-telephone and arms-export monopolies; China's aluminum monopoly, power-transmission duopoly, and major telecommunications companies and airlines; and India's national railway, which is among the world's largest nonmilitary employers, with over 1.4 million employees.


A more recent trend has complicated this phenomenon. In some developing countries, large companies that remain in private hands rely on government patronage in the form of credit, contracts, and subsidies.

These privately owned but government-favored national champions get breaks from the government, which sees them as a means of competing with purely commercial foreign rivals, and they are thus able to carve out a dominant role in the domestic economy and in export markets. In turn, these companies use their clout with their governments to gobble up smaller domestic rivals, reinforcing the companies' strength as pillars of state capitalism.


The task of financing these companies has fallen in part to SWFs, and this has greatly expanded those funds' size and significance. They act as repositories for excess foreign currency earned from the export of commodities or manufactured goods. But SWFs are more than just bank accounts. They are state-owned investment funds with mixed portfolios of foreign currencies, government bonds, real estate, precious metals, and direct stakes in -- and sometimes majority ownership of -- a host of domestic and foreign firms. Like all investment funds, SWFs look to maximize returns. But for state capitalists, these returns can be political as well as economic.

The largest SWFs are those in the emirate of Abu Dhabi, Saudi Arabia, and China, with Russia playing catch-up. The only democracy represented among the ten largest SWFs is Norway.


In short, despite the global financial crisis, national oil companies still control three-quarters of the world's primary strategic resources, state-owned enterprises and privately owned national champions still enjoy substantial competitive advantages over their private-sector rivals, and SWFs are still flush with cash. These companies and institutions are truly too big to fail.

Other protectionist initiatives have begun to weigh on global commerce. China has reinstated tax relief for certain exporters. Russia has limited foreign investment in 42 "strategic sectors" and imposed new duties on imported cars, pork, and poultry. Indonesia has imposed import tariffs and licensing restrictions on over 500 types of foreign products. India has added a 20 percent levy on soybean oil imports. Argentina and Brazil are publicly considering new tariffs on imported textiles and wine. South Korea refuses to drop its trade barriers against U.S. auto imports. France has announced the creation of a state fund to protect domestic companies from foreign takeover.


A growing number of Americans have come to believe that globalization moves their jobs to other countries, depresses their wages, and exposes U.S. consumers to shoddy foreign products. If U.S. would do well to relearn the lessons of the 1930 Smoot-Hawley Tariff Act, which raised tariffs on 20,000 imported goods to record levels, prompted retaliation in kind, and thus deepened and lengthened the Great Depression.

The global financial crisis has created an illusion of international unity based on the mistaken fear that everyone is sinking in the same boat. A year ago, the talk in policy circles was of "decoupling," the process by which emerging economies develop a domestic base for growth broad enough to free them from dependence on consumer demand in the United States and Europe. Predictions of decoupling have proved premature. Economic problems originating largely in the United States have forced a hard landing in dozens of developing countries by crushing demand for their exports.

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

Seventh edition

STRATEGIC

MANAGEMENT

INPUTS

STRATEGIC

MANAGEMENT

INPUTS

© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.All rights reserved.All rights reserved.

Bangladesh Business Community1972-751972-75 MojibMojib Socialistic ApproachSocialistic Approach WarWar

1976-811976-81 JiaJia Mixed Mixed StabilityStability

1981-901981-90 ErshadErshad MixedMixed CorruptionCorruption

1991-951991-95 KhaledaKhaleda Open marketOpen market CorruptionCorruption

And World MarketAnd World Market

1996-20011996-2001 HasinaHasina FDIFDI Corruption And Corruption And World MarketWorld Market

2001-20062001-2006 KhaledaKhaleda FDI and CorruptionFDI and Corruption CorruptionCorruption

2007-20082007-2008 CaGCaG ICUICU EmergencyEmergency

2009-till2009-till HasinaHasina Global Financial Crisis & Global Financial Crisis & PPPPPP

Merger, Acquisition Merger, Acquisition & Confusion& Confusion


Industry EnvironmentIndustry Environment

• The set of factors directly influencing a firm and The set of factors directly influencing a firm and its competitive actions and competitive its competitive actions and competitive responsesresponses

Threat of new entrantsThreat of new entrants

Power of suppliersPower of suppliers

Power of buyersPower of buyers

Threat of product substitutesThreat of product substitutes

Intensity of rivalry among competitorsIntensity of rivalry among competitors


Competitor AnalysisCompetitor Analysis

• Gathering and interpreting Gathering and interpreting information about all of the information about all of the companies that the firm companies that the firm competes against.competes against.

• Understanding the firm’s Understanding the firm’s competitor environment competitor environment complements the insights complements the insights provided by studying the provided by studying the general and industry general and industry environments.environments.


Analysis of the External EnvironmentsAnalysis of the External Environments

• General environmentGeneral environment Focused on the futureFocused on the future

• Industry environmentIndustry environment Focused on factors and conditions influencing a firm’s Focused on factors and conditions influencing a firm’s

profitability within an industryprofitability within an industry

• Competitor environmentCompetitor environment Focused on predicting the dynamics of competitors’ Focused on predicting the dynamics of competitors’

actions, responses and intentionsactions, responses and intentions


TABLETABLE 2.22.2 Components of the External Environmental AnalysisComponents of the External Environmental Analysis

Scanning • Identifying early signals of environmental changes and trends

Monitoring • Detecting meaning through ongoing observations of environmental changes and trends

Forecasting • Developing projections of anticipated outcomes based on monitored changes and trends

Assessing • Determining the timing and importance of environmental changes and trends for firms’ strategies and their management


Opportunities and ThreatsOpportunities and Threats

• OpportunityOpportunity

A condition in the general A condition in the general environment that, if exploited, environment that, if exploited, helps a company achieve helps a company achieve strategic competitiveness.strategic competitiveness.

• ThreatThreat

A condition in the general A condition in the general environment that may hinder a environment that may hinder a company’s efforts to achieve company’s efforts to achieve strategic competitiveness.strategic competitiveness.


Segments of the General EnvironmentSegments of the General Environment

• The Demographic SegmentThe Demographic Segment

Population sizePopulation size

Age structureAge structure

Geographic distributionGeographic distribution

Ethnic mixEthnic mix

Income distributionIncome distribution


Segments of the General Environment Segments of the General Environment (cont’d)(cont’d)• The Economic SegmentThe Economic Segment

Inflation ratesInflation rates

Interest ratesInterest rates

Trade deficits or surplusesTrade deficits or surpluses

Budget deficits or surplusesBudget deficits or surpluses

Personal savings ratePersonal savings rate

Business savings ratesBusiness savings rates

Gross domestic productGross domestic product


Segments of the General Environment Segments of the General Environment (cont’d)(cont’d)• The Political/Legal SegmentThe Political/Legal Segment

Antitrust lawsAntitrust laws

Taxation lawsTaxation laws

Deregulation philosophiesDeregulation philosophies

Labor training lawsLabor training laws

Educational philosophies and Educational philosophies and policiespolicies


Segments of the General Environment Segments of the General Environment (cont’d)(cont’d)• The Sociocultural SegmentThe Sociocultural Segment

Women in the workplaceWomen in the workplace

Workforce diversityWorkforce diversity

Attitudes about quality of worklifeAttitudes about quality of worklife

Concerns about environmentConcerns about environment

Shifts in work and career preferencesShifts in work and career preferences

Shifts in product and service preferencesShifts in product and service preferences


Segments of the General Environment Segments of the General Environment (cont’d)(cont’d)• The Technological SegmentThe Technological Segment

Product innovationsProduct innovations

Applications of knowledgeApplications of knowledge

Focus of private and government-supported R&D Focus of private and government-supported R&D expendituresexpenditures

New communication technologiesNew communication technologies


Segments of the General Environment Segments of the General Environment (cont’d)(cont’d)• The Global SegmentThe Global Segment

Important political eventsImportant political events

Critical global marketsCritical global markets

Newly industrialized countriesNewly industrialized countries

Different cultural and institutional Different cultural and institutional attributesattributes


Industry Environment AnalysisIndustry Environment Analysis

• Industry DefinedIndustry Defined A group of firms producing products that are close A group of firms producing products that are close

substitutessubstitutes• Firms that influence one another Firms that influence one another • Includes a rich mix of competitive strategies that Includes a rich mix of competitive strategies that

companies use in pursuing strategic companies use in pursuing strategic competitiveness and above-average returnscompetitiveness and above-average returns


FIGUREFIGURE 2.22.2 The Five Forces of Competition ModelThe Five Forces of Competition Model


Threat of New Entrants: Barriers to Threat of New Entrants: Barriers to EntryEntry• Economies of scaleEconomies of scale• Product differentiationProduct differentiation• Capital requirementsCapital requirements• Switching costsSwitching costs• Access to distribution channelsAccess to distribution channels• Cost disadvantages independent of scaleCost disadvantages independent of scale• Government policyGovernment policy• Expected retaliationExpected retaliation


Barriers to EntryBarriers to Entry

• Economies of ScaleEconomies of Scale Marginal improvements in efficiency that a firm Marginal improvements in efficiency that a firm

experiences as it incrementally increases its sizeexperiences as it incrementally increases its size

• Factors (advantages and disadvantages) related Factors (advantages and disadvantages) related to large- and small-scale entryto large- and small-scale entry Flexibility in pricing and market shareFlexibility in pricing and market share

Costs related to scale economiesCosts related to scale economies

Competitor retaliationCompetitor retaliation


Barriers to Entry (cont’d)Barriers to Entry (cont’d)• Product differentiationProduct differentiation

Unique productsUnique products Customer loyaltyCustomer loyalty Products at competitive Products at competitive

pricesprices

• Capital RequirementsCapital Requirements Physical facilitiesPhysical facilities InventoriesInventories Marketing activitiesMarketing activities Availability of capitalAvailability of capital

• Switching CostsSwitching Costs One-time costs customers One-time costs customers

incur when they buy from a incur when they buy from a different supplierdifferent supplier

• New equipmentNew equipment• Retraining employeesRetraining employees• Psychic costs of ending a Psychic costs of ending a

relationshiprelationship

• Access to Distribution Access to Distribution ChannelsChannels Stocking or shelf spaceStocking or shelf space Price breaksPrice breaks Cooperative advertising Cooperative advertising

allowancesallowances


Barriers to Entry (cont’d)Barriers to Entry (cont’d)• Cost Disadvantages Cost Disadvantages

Independent of ScaleIndependent of Scale Proprietary product Proprietary product

technologytechnology Favorable access to raw Favorable access to raw

materialsmaterials Desirable locationsDesirable locations

• Government policyGovernment policy Licensing and permit Licensing and permit

requirementsrequirements Deregulation of industriesDeregulation of industries

• Expected retaliationExpected retaliation Responses by existing Responses by existing

competitors may depend competitors may depend on a firm’s present stake in on a firm’s present stake in the industry (available the industry (available business options)business options)


Bargaining Power of SuppliersBargaining Power of Suppliers

• Supplier power increases when:Supplier power increases when: Suppliers are large and few in number.Suppliers are large and few in number.

Suitable substitute products are not available.Suitable substitute products are not available.

Individual buyers are not large customers of suppliers Individual buyers are not large customers of suppliers and there are many of them.and there are many of them.

Suppliers’ goods are critical to the buyers’ Suppliers’ goods are critical to the buyers’ marketplace success.marketplace success.

Suppliers’ products create high switching costs.Suppliers’ products create high switching costs.

Suppliers pose a threat to integrate forward into Suppliers pose a threat to integrate forward into buyers’ industry.buyers’ industry.


Bargaining Power of BuyersBargaining Power of Buyers

• Buyer power increases when:Buyer power increases when:

Buyers are large and few in number.Buyers are large and few in number.

Buyers purchase a large portion of an industry’s total Buyers purchase a large portion of an industry’s total output.output.

Buyers’ purchases are a significant portion of a Buyers’ purchases are a significant portion of a supplier’s annual revenues.supplier’s annual revenues.

Buyers’ switching costs are low.Buyers’ switching costs are low.

Buyers can pose threat to integrate backward into the Buyers can pose threat to integrate backward into the sellers’ industry.sellers’ industry.


Threat of Substitute ProductsThreat of Substitute Products

• The threat of substitute products increases The threat of substitute products increases when:when:

Buyers face few switching costs.Buyers face few switching costs.

The substitute product’s price is lower.The substitute product’s price is lower.

Substitute product’s quality and performance are Substitute product’s quality and performance are equal to or greater than the existing product.equal to or greater than the existing product.

• Differentiated industry products that are valued Differentiated industry products that are valued by customers reduce this threat.by customers reduce this threat.


Intensity of Rivalry Among CompetitorsIntensity of Rivalry Among Competitors

• Industry rivalry increases when:Industry rivalry increases when: There are numerous or equally balanced competitors.There are numerous or equally balanced competitors.

Industry growth slows or declines.Industry growth slows or declines.

There are high fixed costs or high storage costs.There are high fixed costs or high storage costs.

There is a lack of differentiation opportunities or low There is a lack of differentiation opportunities or low switching costs.switching costs.

When the strategic stakes are high.When the strategic stakes are high.

When high exit barriers prevent competitors from When high exit barriers prevent competitors from leaving the industry.leaving the industry.


Low entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

UnattractiveUnattractiveIndustryIndustry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential


Interpreting Industry Analyses (cont’d)Interpreting Industry Analyses (cont’d)

AttractiveAttractiveIndustryIndustry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential


Strategic GroupsStrategic Groups

• Strategic Group DefinedStrategic Group Defined A set of firms emphasizing similar strategic A set of firms emphasizing similar strategic

dimensions and using similar strategiesdimensions and using similar strategies• Internal competition between strategic group firms Internal competition between strategic group firms

is greater than between firms outside that strategic is greater than between firms outside that strategic group.group.

• There is more heterogeneity in the performance of There is more heterogeneity in the performance of firms within strategic groups.firms within strategic groups.

– Similar market positionsSimilar market positions– Similar productsSimilar products– Similar strategic actionsSimilar strategic actions


Strategic GroupsStrategic Groups

• Strategic DimensionsStrategic Dimensions

Extent of technological leadershipExtent of technological leadership

Product qualityProduct quality

Pricing PoliciesPricing Policies

Distribution channelsDistribution channels

Customer serviceCustomer service


Competitor AnalysisCompetitor Analysis

• Competitor IntelligenceCompetitor Intelligence The ethical gathering of needed information and data The ethical gathering of needed information and data

that provides insight into:that provides insight into:

• A competitor’s direction (A competitor’s direction (future objectivesfuture objectives))

• A competitor’s capabilities and intentions (A competitor’s capabilities and intentions (current current strategystrategy))

• A competitor’s beliefs about the industry (A competitor’s beliefs about the industry (itsits assumptionsassumptions))

• A competitor’s A competitor’s capabilitiescapabilities


FIGUREFIGURE 2.22.2

Competitor Competitor Analysis Analysis ComponentsComponents


Competitor Analysis (cont’d)Competitor Analysis (cont’d)

• How do our goals How do our goals compare with our compare with our competitors’ goals?competitors’ goals?

• Where will the emphasis Where will the emphasis be placed in the future?be placed in the future?

• What is the attitude What is the attitude toward risk?toward risk?

Future ObjectivesFuture Objectives



• How are we currently How are we currently competing?competing?

• Does this strategy Does this strategy support changes in the support changes in the competitive structure?competitive structure?


Current StrategyCurrent Strategy



• Do we assume the Do we assume the future will be volatile?future will be volatile?

• Are we operating under Are we operating under a status quo?a status quo?

• What assumptions do What assumptions do our competitors hold our competitors hold about the industry and about the industry and themselves?themselves?



AssumptionsAssumptions



• What are our strengths What are our strengths and weaknesses?and weaknesses?

• How do we rate How do we rate compared to our compared to our competitors?competitors?




CapabilitiesCapabilities



• What will our What will our competitors do in the competitors do in the future?future?

• Where do we hold an Where do we hold an advantage over our advantage over our competitors?competitors?

• How will this change How will this change our relationship with our relationship with our competitors?our competitors?

ResponseResponseFuture ObjectivesFuture Objectives



CapabilitiesCapabilities


ComplementorsComplementors

• ComplementorsComplementors The network of companies that sell complementary The network of companies that sell complementary

products or services or are compatible with the focal products or services or are compatible with the focal firm’s own product or service.firm’s own product or service.

• If a complementor’s product or service adds value If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it to the sale of the focal firm’s product or service, it is likely to create value for the focal firm.is likely to create value for the focal firm.

• However, if a complementor’s product or service is However, if a complementor’s product or service is in a market into which the focal firm intends to in a market into which the focal firm intends to expand, the complementor can represent a expand, the complementor can represent a formidable competitor.formidable competitor.


Ethical ConsiderationsEthical Considerations

• Practices considered both legal and ethical:Practices considered both legal and ethical: Obtaining publicly available informationObtaining publicly available information

Attending trade fairs and shows to obtain competitors’ Attending trade fairs and shows to obtain competitors’ brochures, view their exhibits, and listen to brochures, view their exhibits, and listen to discussions about their productsdiscussions about their products

• Practices considered both unethical and illegal:Practices considered both unethical and illegal: BlackmailBlackmail

TrespassingTrespassing

EavesdroppingEavesdropping

Stealing drawings, samples, or documentsStealing drawings, samples, or documents

Documents

The External EnvironmentOpportunities, Threats,Industry Competition,And Competitor Analysis